Credit growth surpasses fresh deposit collectionCommercial banks are seeing an uptick in demand for loans with the rise in confidence of borrowers, which had slumped following last year’s earthquakes and subsequent Indian trade embargo.
Commercial banks are seeing an uptick in demand for loans with the rise in confidence of borrowers, which had slumped following last year’s earthquakes and subsequent Indian trade embargo.
A total of 28 commercial banks extended around Rs60 billion in loans between mid-July—when the new fiscal year began—and September 23, show the latest data of the Nepal Bankers’ Association (NBA), the umbrella body of commercial banks.
“Demand for credit has gone up across the board—from hydroelectric and tourism sectors to real-estate and retail sectors,” Laxmi Bank CEO Sudesh Khaling told the Post. “This is happening because borrowers are unleashing the pent-up credit demand of the period when business activities suffered due to devastation caused by the earthquakes and supply disruptions along the Nepal-India border.”
Many physical infrastructure project developers had either postponed construction plans or slowed down the pace of construction because of the earthquakes of April and May 2015 and Indian trade embargo, which continued from fourth week of September 2015 to the first week of February 2016.
Many industries too were operating at far lower capacity than in normal days due to the quakes and blockade, while consumer confidence was also hit, with many postponing plans to purchase cars and houses.
“Since everything has normalised now, borrowers are reaching out to banks and demanding for loans to implement projects, raise production, or buy a house or a car,” said Khaling.
While the demand for loan is growing, deposit collection has trailed behind. Between mid-July and September 23, deposits of commercial banks grew by around Rs53 billion, as against credit growth of about Rs60 billion, show the NBA data. This mismatch is lowering the stock of loanable funds at commercial banks.
As of September 23, commercial banks had around Rs44 billion that could be immediately extended as loans, as against about Rs64 billion recorded in mid-July. “To increase the portion of loanable funds, the level of deposits must go up,” said Civil Bank CEO Kishore Maharjan.
To attract funds, a few banks have started offering interest of 7.5 to 8 percent on institutional deposits. Also, the interest on one-year fixed deposit has gone up to around 7 percent. “But raising interest rates alone may not solve the problem, as it would only lead to transfer of money parked at one financial institution to the other. So, fresh funds must enter the economy,” said Maharjan.
For this, government spending, especially capital spending, must go up, according to Maharjan.
Generally, capital spending reduces credit stock at banks because contractors, who have borrowed money to implement various government projects, start repaying the debt.
Likewise, payments made by contractors to various
parties following release of government funds raise the stock of deposit at banking institutions.
In the first two months of the current fiscal year, the government used only 0.9 percent of the total capital budget of Rs311.9 billion, show the data of the Financial Comptroller General
Office, signalling weak capital spending.